Summary: Political outcomes - such as agricultural taxation, subsidization, and the provision of public goods - result from political bargaining among interest groups. Such bargaining is likely to be efficiency-enhancing and growth-enhancing when equally powerful interest groups - aware of the economywide budget constraint and know the economic implications of different policy options - participate, and when impartial institutions are available to enforce decisions. The greater the deviation from these conditions, the greater the potential for efficiency-reducing outcomes, the costs of which will generally fall disproportionately on politically underrepresented or powerless groups. Material conditions of agriculture production - such as spatial dispersion, seasonal work cycles, covariance of risk, and the associated market imperfections - exacerbate the difficulties faced by small producers to engage in collective action. So, despite being generally the economically most efficient form of production, family farmers' ability to counteract the political influence of rural elites and urban dwellers is extremely limited. Lack of independent institutions and clearly defined property rights - and the presence of organizational residues - not only reduce peasants' bargaining power but may also make it more profitable for powerful groups to prefer rent seeking to productive activities. How can these undesirable outcomes be avoided, and how can sustainable policy changes be initiated? Experience indicates that fiscal crises of the state, often triggered or aggravated by an external shock, can cause lasting changes of policies and institutions. By forcing the state to devolve some of its power in exchange for financial assistance to meet its immediate needs, such a crisis can give rise to the emergence of independent legal, political, and economic institutions that are maintained even once the crisis has subsided, External actors that provide resources in terms of crisis and at the same time enhance the scope for politically least vocal parts of civil society to participate in political discourse can have a significant impact on changing policy. The paper discusses in detail the implications for research as well as for policy advice.
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